Tuesday, December 6, 2022

Three Arrows Capital Blowed Through Billions With Risky Cryptocurrency Betting

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Now bankrupt Three Arrows Capital (3AC) showed signs of mismanagement before the eventual collapse of the cryptocurrency hedge fund. A report of New York Magazine reveals that 3AC co-founders Kyle Davies and Su Zhu faced criticism from banks and other traders before the company even entered the crypto market.

In its early days, Singapore-based 3AC started trading foreign exchange (FX) and reportedly practiced something called currency arbitrage, allowing Zhu and Davies to cash in on mispriced quotes from various brokers, even if it resulted in gains of only “fractions of a cent on every dollar traded.” According to New York Magazine, banks sometimes tried to contact 3AC in an attempt to cancel or amend the transaction, but the company refused. Banks reportedly started shutting down 3AC by 2017.

“We FX traders are partly to blame for this, because we were sure these guys couldn’t make money in FX,” said a former trader. New York magazine. “But when they got to crypto, everyone thought they were geniuses.”

When 3AC made the move to trading crypto, it found success by applying the same principles of currency arbitrage to the market. But New York Magazine notes that investors began to realize that something “might not be right” about the company in 2019, when it offered to sell its stake in a crypto options exchange, Deribit, for an inflated price of $700 million. In reality, the value of the investment was reportedly only $289 million, and 3AC was trying to “turn some of its investment around at a steep price hike, essentially giving the fund a huge kickback.”

The co-founders of 3AC later bragged about the company’s $2 billion investment in GBTC (Grayscale Bitcoin Trust) – but the company reportedly took too long to sell its position and saw its profits evaporate. As reported by New York Magazine, Davies admitted he knew GBTC’s value would eventually fall during a podcast created by venture capital firm Castle Island and later asked the producers to remove that part before the show went live (which they did).

3AC also bet heavily on Terra and its sister coin Luna, which crashed after slipping off its dollar pin in May. Herbert Sim, a Singapore-based investor who tracked 3AC’s portfolios, said: New York Magazine that 3AC’s holdings went from about $500 million to just $604 in the wake of the collapse. In an interview with The Wall Street JournalDavies and Zhu admitted the company lost $200 million in investments, but said they “have always been crypto believers” and “still are”.

And that’s how we got here. 3AC filed for bankruptcy last month, bringing down crypto broker Voyager Digital. Crypto billionaire and the founder of the FTX exchange, Sam Bankman-Fried, blames 3AC for causing a ripple effect that caused crypto firms to file for bankruptcy or freeze transactions. “I suspect they are 80 percent of the total original contamination,” Bankman-Fried said in a statement to… New York magazine. “They weren’t the only people who blew out, but they did it much bigger than anyone else. And for that, they had much more trust from the ecosystem.”

The 3AC co-founders are believed to be in hiding and lenders can’t get their hands on the pair. According to New York Magazine, there are theories that the company borrowed money from individuals involved in organized crime, and that is why the co-founders have apparently disappeared without a trace. 3AC reportedly routed $32 million worth of stablecoins through the Cayman Islands, a location that the ultra-rich often use as a way to launder money because of the lax tax laws.

Last month, Zhu and Davies held an interview with Bloomberg from an “undisclosed location” and told the outlet that they planned to go to Dubai, where the US or Singapore have no extradition agreements. The couple leaves behind a $150 million superyacht – called “Much Wow” in reference to the Doge meme — and $30 million Singaporean mansion that Zhu has already looked at the sale.


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